Choosing the right loan

These days there are so many different lending products on the market that it’s very hard sometimes to work out which loan offers the best solution to your own financial situation. Nor is it always easy to plan your financial future in order to know which product has the features that will save you the most money further down the track.

While the interest rate is the first feature to look for, there are many other things to consider before locking yourself in. The ‘best’ loan is not necessarily the cheapest (as with many other products), nor is it the one with the most features. Often cheapness means inflexibility – which may cost you more in the long run if you want to change the way you pay it back. On the other hand, why pay for features you are confident you will never need?

VARIABLE LOANS are the most commonly utilised loans. ‘Variable’ means the interest rate isn’t locked in and is likely to vary when official interest rates change. Most banks offer several variable products. The more features offered by a loan, the more the interest rate and fees. Features include, for example, a mortgage offset facility and a re-draw facility (which is useful as long as you’re disciplined enough not to keep drawing the money out to use for lifestyle purposes).

FIXED INTEREST LOANS offer, as the name suggests, fixed interest rates on your mortgage for a specified time. This is useful in times of rising interest rates as the schedule of re-payment is set in advance and borrowers can budget more easily because their costs are fixed and predictable. However, it is worth noting that fixed interest rates are usually higher than variable ones to protect lenders from losses as a result of fluctuations – and they have an early termination penalty as well.

SPLIT LOANS or combination loans allow borrowers to have half their loan as a variable loan and half as a fixed interest loan. This means that no matter what happens to interest rates, they are protected from the full force of the lending conditions becoming less favourable to their choice.

INTRODUCTORY RATE LOANS have a ‘honeymoon’ period where the rates are lower, then the rates go up as the period of the loan gets longer. It’s important to weigh up the long-term costs (the term of the loan is likely to be 25 years so any savings are likely to be absorbed) against the short term benefit. It works well for those who are expecting to have more money as time goes on, or if property prices are rapidly rising and it’s the only way you can afford to get into the housing market. Re-financing introductory rate loans can be expensive and early termination of the loan may incur penalties.

INTEREST-ONLY LOANS enable borrowers to repay the interest only for a designated number of years of the loan term.

There are several other special loans available including Line of Credit or Equity loans (these often suit investors increasing their property portfolio) and Low Documentation loans (which often suit self-employed borrowers). Check with your financial adviser and bank to see if there is a loan variation that suits your particular situation better than the standard loans on offer.